In the past, a non-UK domiciled individual who wishes to purchase a residential property in the UK could be advised to do so through an offshore company. The individual would set up a limited company in a foreign jurisdiction and then that company would purchase the property, and the individual would be the main shareholder in the company but why go to these sorts of lengths to buy a residential property?
There were distinct tax advantages :
There would be no stamp duty on the purchase as it would be through a corporate structure and this was exempt from stamp duty. There would be no liability to capital gains tax on the later disposal of the property as a non-UK resident company would not pay UK tax on capital gains.
There would be a potential saving for UK inheritance tax as the property would not be owned personally as a deterrent to this tax avoidance
Her Majesty’s Revenue and Customs made changes from the 21st of March 2012 which makes this type of corporate ownership less attractive.
First, they introduced stamp duty of 15% on a property where the purchase price was above 2 million pounds and it was bought by what is termed non-natural persons: a company or some partnership structures for example;
From the 20th of March 2014, this threshold was lowered and the fifteen percent rate now applies to properties valued at over £500,000.
On the first of April 2013, they introduced the ATED or using the full catchy name the annual tax on enveloped dwellings: an annual tax on residential properties owned by nonnatural persons and is applied on a banded basis according to the value of the property initially introduced on property worth 2 million £ and above. From April 2015 it applies to property valued from 1 million pounds and above and from April 2016 on property valued at £500,000 and above. These rates for the 2014-15 texture were increased dramatically as a result of the Autumn Statement in December 2014 over the period of ownership. This could be quite significant, and these amounts payable should increase annually in line with a consumer prices index. In some instances, relief is available for residential properties where they are owned for commercial purposes such as by a rental business or a developer.
From April 2013 for any property within the ATD regime, capital gains tax of 28% percent is payable where an offshore company sells a residential property. These taxes can make it very expensive to own a property through a corporate structure to avoid the ATD regime the property needs to be owned by an individual and this can be done from the outset or the property can be de-enveloped from the corporate ownership.
This approach does have implications when the owner sells the property or dies.
A property owned personally could benefit from private residence relief if it is the owner’s main residence; this could mean that there is no capital gains tax on the sale of the property potentially saving a considerable amount of money. However, if not capital gains tax could apply to the owner personally, the personal capital gains tax has been extended and from 6th of April 2015. Non-UK domiciled individuals will pay capital gains tax on UK assets including residential property. Even if they are non-UK residents they qualify for the annual exemption and once this and losses have been offset the gains are subject to 18% or 28% tax. The amount of the annual exemption is, as the name suggests, exempt. The balance up to the level of the higher rate income tax threshold is chargeable 18% and the
remainder is taxed 28% percent. Whilst this could still amount to a large sum of money, it could be marginally lower than the flat rate of 28% percent that applies to residential properties sold by a non-natural person. There could also have been capital gains tax on De-enveloping the property.
As the property is owned personally, it will potentially be subject to UK inheritance tax. Someone who is UK domiciled pays UK inheritance tax on their worldwide assets; with a few exceptions: a non-domiciled individual who has been resident in the UK for 17 out of the last 20 tax years, is deemed to be domiciled in the UK for inheritance tax purposes. They will also pay UK inheritance tax on their worldwide assets. However, a non-UK domiciled individual, who is not deemed to be domiciled (because they’re not resident for example) only pays UK inheritance tax on their UK assets with a
few exceptions.
Currently, the first £325,000 of the property could be taxed at O%, depending on what other assets the individual has in the UK. Once this Nil rate band has been used, Uk Inheritance Tax of 40% could be payable on the remainder.
On a property worth 2 million pounds, once the nil rate band has been deducted, the balance of £1,675,000 could be subject to 40% tax giving a liability of £670,000; therefore, if a non-UK domiciled individual bought a property personally, their heirs could potentially pay a significant amount of UK Inheritance Tax. In order to meet this liability, it is possible for the individual to take a suitable life insurance policy, under trust, to provide a lump sum on their death for their heirs. The cost of this life insurance will depend on a number of factors such as health and lifestyle choice (if they smoke for example). However, the overall costs can be significantly lower than the costs involved with corporate ownership, the stamp duty, land tax at outset and the ATED chargeable each and every year of ownership.
Charges
The annual chargeable amounts for ATED increase annually in line with the Consumer Prices Index (CPI).
| Property Value | Annual |
| £500K to £1m | £3,500 |
| £1m to £2m | £7,000 |
| £2m to £5m | £23,350 |
| £5m to £10m | £54,450 |
| £10m to £20m | £109,050 |
| >£20m | £218,200 |
ATED applies on a proportionate basis (the ATED you pay will be calculated by reference to the number of days in the year the property falls within ATED) if you only own the dwelling for part of a year or you change how you use the property so that it moves into or out of ATED. Properties are valued as at their 2012 value or if purchased after this date as at the date of purchase. HMRC require properties to then be valued every five years from 2012. Therefore, the next valuation date will be 1 April 2017.
Assistance
If you are affected by ATED and require assistance or tax advice, please contact one of our team, who will be happy to assist you.
About the Author
